I - Overview : the stress on country risk has vanished in the past several months but improvements in fundamentals are slow and fragile in a context of mixed international environment

1.1/ Country risk has receded worldwide in the past several months as risks, that emerged or persisted in 2002 until winter 2002-03, have sharply reduced :

- conclusion of the war in Iraq without major catastrophic event, progressive eradication of Atypical Pneumonia ;

- favorable evolution, at least until now, of the scenarios for Brazil and, to a lesser degree, Turkey. The changes in risk for these two countries are likely to influence investment behavior towards all the emerging zones;

- advances in international financial architecture. The SDRM ("Sovereign Debt Restructuring Mechanism") will likely be succeeded by "Collective Action Clauses"(1) and greater cooperation between the private financial sector and international institutions, changes that comply with the wishes of international private financial investors. International markets have learned, to a certain extent, to deal with sovereign payment defaults (Ecuador, Pakistan, Ukraine, Uruguay).

* Moreover, the contagion effect has clearly run its course (the Brazilian crisis, the war in Iraq, the Venezuelan crisis have not widespread), as a consequence of reduced financial vulnerability: progressive improvement since 1999 in liquidity and external solvency ratios(2), retreat of speculative capital flows, increasing implementation of floating exchange regimes, consolidation of certain banking systems with the subsequent efficiency gains in monetary policy. Investors' greater sophistication, especially in terms of deeper knowledge of the countries, has also contributed to this development.

* All in all, as summer begins, the financial environment of emerging countries is under much less strain than a year ago: the internet bubble's demise, fears of accounting irregularities in US companies mitigated, sector risks better defined, near-term fears for the scenarios in Brazil, Turkey, Lebanon alleviated, etc.

(1) Already used for some months in the bond issues of Mexico and Uruguay (debt swap).(2) The ratio of external debt to the exports of principal emerging countries went from 155 % in 1998 to 105 % in 2003 (IIF estimate).